Atlanta - Late at night, in a basement laboratory at Stanford University, Brian Knutson made a startling discovery: our brains lust after money just like they crave sex.
It was May 2004, and Knutson, a professor of neuroscience and psychology at the California university, was sending student volunteers through a high-power imaging machine called an fMRI.
Deep inside each subject's head, blood rushed to the brain's pleasure centre as students executed mock stock trades. On Knutson's screen, this tiny region of the brain flashed yellow.
The pleasure of orgasm, the high from cocaine, the rush of buying Google shares at $450 (R2 790) each: the same neural network governs all three, Knutson concluded. And our primal pleasure circuits can override our seat of reason, he says. In other words, stocks, like sex, can drive us crazy.
Knutson knows how heretical his findings are. Wall Street is dedicated to the principle that in money matters, logic prevails. The idea is enshrined in the economic theory of rational expectations, for which Robert Lucas won the 1995 Nobel prize in economics.
Lucas, a professor of economics at the University of Chicago, maintains that people make economic choices based on all the information available to them and learn from their mistakes.
So their expectations of the future, from the price of Citigroup stock next week to the General Motors' earnings next quarter, are, on average, accurate.
Or so the theory goes. In practice, of course, investors do foolish things all the time. Some gamble away fortunes on losing investments, doubling down when logic tells them to fold, or letting winnings ride when the rational person would cash out.
Others seem to have an uncanny knack for knowing when to buy and sell. In the 1970s, Richard Dennis parlayed several thousand dollars into a $200 million fortune trading commodities in the Chicago futures pits.
In the 1980s, hedge fund icon Paul Tudor Jones made $80 million by betting against US stocks just before the market crashed. And in the 1990s, billionaire investor George Soros made $1 billion in an afternoon by shorting the pound.
The question that nags Knutson is: why do some traders get rich while others walk away losers? The answer, he says, may lie in the 96 000km of neural wiring inside our brains.
The results of the Stanford study, published in the September issue of Neuron magazine, have caused a stir among the small group of neuroscientists and psychologists who are mapping the human brain in hopes of understanding investor behaviour.
This controversial field, called neurofinance, may represent the next great frontier on Wall Street, says Daniel Kahneman, who won the 2002 Nobel prize in economics for his pioneering work in behavioural finance, which fuses classical economic theory and studies of human psychology.
"The brain scientists are the wave of the future in the financial world," Kahneman says. "If you seek to maximise understanding, you'd better pay very serious attention to them."
To proponents, the potential of neurofinance seems virtually limitless.
One day, says David Darst, the chief investment strategist at Morgan Stanley, brain science may help money managers spot shifts in investor sentiment. Armed with brain scans, psychotherapists may be able to hone traders' natural impulses of fear and greed.
Neuroscientists may even develop psychoactive drugs, or neuroceuticals, that make people better traders, Knutson and other psychologists say.
In a few short years, drugs like Prozac have helped people recognise that chemistry drives their brains, moods and behaviour, and that chemistry can change them.
Zack Lynch, the managing director of NeuroInsights, says similar drugs to improve a trader's decision making by between 20 percent and 30 percent may be just a few years away.
If these neuroceuticals work, "the whole investment community will be scrambling to get them," Lynch says.
So far, the claims of neurofinance have far outpaced the science. Few investment professionals have even heard of the field. Many dismiss it as hokum.
"It's the latest malarkey," says Richard Michaud, the president of New Frontier Advisors. Michaud, who has a doctorate in mathematics from Boston University, says neurofinance and its forerunner, behavioural finance, have no place on Wall Street.
"I find these so-called disciplines to be more of a marketing tool, a way of taking an ages old market valuation problem and calling it something space age," Michaud says.
Knutson's response? Just wait.
"Investors want to beat the market and become better traders," he says. "The first step is to know how the machinery
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